Merchant Cash Advances Vs Loans: Which One’s For You

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Written by Michael Foote , founder of Quote Goat, with over 13 years experience working in the finance, insurance and currency sectors.
22/08/2020

Looking to borrow money for your business? You may have seen merchant cash advances being touted as a risk-free alternative to a loan but beware before you dive right in as they might not necessarily be the ideal solution to all your cashflow problems.

As a lesser known form of borrowing, there’s an element of uncertainty surrounding merchant advance payments with some people still confusing them for a regular business loan. While loans and merchant cash advances are certainly similar, there are some differences between the two you should be aware of.

This means it’s important to understand the pros and cons of both of these different finance options, so you can work out which one suits your circumstances the best. In order to help you decide which one’s for you, here’s all you need to know about the difference between loans and merchant cash advances.

How do they differ?

So, we’ve already established that these two types of borrowing are different, but how exactly do they differ? Well, let’s take a look at each.

A business loan is a lump sum that you borrow and agree to pay back in instalments. These instalments will be equal in amount and frequency.

Similarly, a merchant cash advance is also a lump sum that you’ll receive up front. However, where this differs from a loan is with the repayment structuring. Whereas with a loan you’ll pay the same amount each month, with a merchant cash advance you’ll pay an agreed percentage of your daily credit or debit card sales. This means that if your takings each month differ, so will your repayments.

Which would suit you more?

If your business is already well-established, then a busines loan is probably the better option for you. If you’re profitable and anticipate you’ll be able to keep up with the repayments, then the stable nature of the repayment terms will probably make this the more sensible choice.

If you’re just starting off and you don’t want to commit to the same size repayments every month, then a merchant cash advance may be better suited to your situation. As this type of finance depends on your takings, this may also be the better choice for seasonal businesses whose income fluctuates depending on the time of year. That way, you won’t have to worry about making large repayments when takings are down as the repayments will reflect the performance of your business.

A Merchant cash advance can be a great alternative to a business loan, but with each offering its own pros and cons, be sure that whichever one you choose, it’s the right fit for your business.

Use Quote Goat to compare merchant cash advances and other business finance such as invoice finance to ensure you find the best deal for you.

 

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